Budget fix elusive as IOU deadline approaches

SACRAMENTO — With the clock ticking toward a midnight deadline, Gov. Schwarzenegger and Democratic lawmakers remained at odds Tuesday over a deal to help the cash-strapped state avert IOUs.

Failure to reach agreement would ensure that the state would run out of cash, forcing issuance of IOUs, and would worsen fiscal problems by preventing more than $3 billion in proposed school cuts for the fiscal year that ends at midnight.

Senate President Pro Tem Darrell Steinberg and Assembly Speaker Karen Bass said the bottom line is that the governor is insisting upon cuts that would devastate the safety net for vulnerable Californians.

"The price is too high, especially when there are other options," Steinberg said.

The Democratic leaders said they were sending to Schwarzenegger late Tuesday a $21.5 billion budget package that contains more than $11 billion in program cuts and eliminates previous proposals to increase taxes on cigarettes and oil production.

"We intend to do everything we can to put on his desk the billions of dollars of solutions necessary to avert IOUs," Steinberg said.

The Democratic proposal rejects a pay cut for state workers that is sought by Schwarzenegger. It does not include $2 billion in borrowing from cities and counties, but Steinberg said that remains on the table.

Schwarzenegger late Tuesday vetoed two bills Democrats sent him and said he would reject any proposal that does not total $24 billion in solutions or only would be a stopgap.

Schwarzenegger has pushed for about $5 billion more in cuts than the package proposed by the Democrats.

Bass and Steinberg conceded that prospects are dim for their package.

"But maybe he'll have second thoughts," Bass said.

The Democrats offered an olive branch in an attempt to win Schwarzenegger's support for the three bills that would avert the issuance of IOUs and buy time for more talks.

The bills would free money by cutting spending on education in the fiscal year that ended at midnight; defer some payments to schools, colleges and local governments; and redirect money from local redevelopment areas to school districts.

Schwarzenegger turned thumbs down on the Democrats' efforts, with his spokesman saying it only defers the problem.